Directors, executives and advisers involved in mergers and acquisitions should be on full alert following a number of recent allegations of ‘bid rigging’ and misleading and deceptive conduct in M&A transactions.
The Federal Court’s decision in Bradken is the first test of Australia’s new cartel and bid rigging rules and the outcome is alarming. Vendors and purchasers will need to be vigilant in conducting M&A negotiations and joint bidders must be cautious about how they develop and document their relationship.
For those found guilty of cartel behaviour the penalties are serious. Directors, executives and advisers can face up to 10 years imprisonment.
The Bradken case
The Bradken case dates back to July 2011 when Norcast sold a Canadian mining consumables company, NWS, to a subsidiary of Castle Harlan for US$190 million. Castle Harlan then on-sold NWS to Bradken on the same day for US$212.4 million, giving it a sizeable profit.
As Bradken and NWS were global competitors, Norcast had decided not to directly contact Bradken about the deal. However, during the sale process a Bradken representative had been an undisclosed “consultant” to Castle Harlan and received confidential information about NWS without Norcast’s knowledge. Castle Harlan also made statements to Norcast on site visits where it denied Bradken’s involvement.
Despite there being no communication between Bradken and the vendor during the entire sale process, Gordon J found Bradken engaged in bid rigging in breach of the Competition and Consumer Act (CCA).
The judge also found that Bradken’s failure to disclose its arrangement with Castle Harlan constituted misleading or deceptive conduct. Bradken’s Chairman, Nick Greiner, and CEO, Brian Hodges, were found to have aided, abetted, counselled or procured Bradken’s contraventions or were at least knowingly concerned in them.
The findings against Bradken, its Chairman and CEO are surprisingly harsh given they were never in contact with the vendor or its financial adviser at any stage of the process. It seems unrealistic to have expected Bradken to proactively contact Norcast to disclose its arrangement with Castle Harlan in these circumstances.
Nevertheless, the decision shows how the ACCC’s anti-cartel and bid rigging rules will be applied to M&A transactions and the ramifications for both companies and individuals.
It also highlights the extensive reach of these rules, given Bradken was the only Australian company involved in the transaction, with all other participants (including the target company) being foreigners.
There are key lessons from the Court’s judgment for everyone involved in M&A deals. More than ever, transparency and rigorous documentation will prevent these situations from happening and provide the best defences against accusations of bid rigging or misleading conduct.
In Bradken, the vendor, Norcast, could have prevented the ultimate outcome by taking a few practical steps such as:
- communicating with Bradken directly about the sale process;
- requiring Castle Harlan to disclose the identity of consultants in its confidentiality arrangements; and
- seeking representations in the sale agreement about Castle Harlan’s intentions.
There are also lessons for bidders, particularly in joint bid situations or where parties have back-to-back arrangements. Any communication with the vendor about the bidder’s intentions must be well considered, including whether to disclose any proposed on-sale arrangements.
Joint bidders should carefully plan how their own relationship is developed and documented. It may be possible to structure the arrangements to ensure they fall within carve-outs to the bid rigging rules. Email communication can be perilous and must be managed with special care.
Bradken Ltd is appealing the Federal Court’s decision. Norcast has also commenced proceedings against Castle Harlan for fraud and unjust enrichment in the US District Court.
Two other recent claims in the Federal Court concern the sale of businesses by private equity firms – one involves an aggrieved vendor while the other has been filed by an aggrieved purchaser.
In the MYOB case, Archer Capital is taking legal action against Sage. In August 2011, shortly before the sale agreement was due to be executed, Sage decided not to proceed with its proposed $1.35 billion acquisition of MYOB from Archer. Archer then sold MYOB to another party two days later for $150 million less.
Archer is seeking damages from Sage on the basis that it accepted Sage’s final offer and the offer conditions didn’t allow Sage to withdraw, while Sage argues that its final offer was subject to contract and no agreement was executed.
The other lawsuit involves Asahi’s acquisition of Independent Liquor from PEP and Unitas Capital for NZ$1.5 billion in September 2011. Asahi claims PEP and Unitas misrepresented the financial position of Independent Liquor by significantly overstating its earnings during the sale process. It is accusing PEP and Unitas of 22 breaches of the CCA.
Finally, in the United States, Dahl v Bain Capital Partners, LLC involves a class action against ten large private equity firms, including Blackstone Group and KKR. The court found evidence that these private equity firms were adhering to an agreed code not to compete with each other’s announced proprietary deals. The case is now proceeding to a jury trial.
As these cases come before the courts there are likely to be further developments in this area of the law with significant consequences for M&A participants.